More than 40 percent of major U.S. lenders are failing to satisfy the Federal Reserve’s expectations in key areas of risk management, the central bank said Friday in a report that reveals the regulator’s overall assessment of the industry.
The Fed’s inaugural Supervision and Regulation Report highlights a number of positives – including high capital and liquidity reserves – but it also shows how risks may now come from mismanagement, cyberattacks and failures to protect the banking system. Those faults are contributing to so many firms failing to make the top two of the five categories – “strong” or “satisfactory” – that measure a bank’s strength.
“While most firms have improved in key areas of supervisory focus, such as capital planning and liquidity management, some firms continue to work to meet supervisory expectations in certain risk-management areas,” the Fed said. The bottom three categories are “fair,” “marginal” and “unsatisfactory,” with the lower two rungs signaling major, immediate problems or even pending collapse.
The Fed also tallied the number of private internal directives, such as “matters requiring attention,” it issues to bankers to fix problems. The biggest U.S. banks get dozens of them each year, and the numbers have generally been declining – from about 1,000 five years ago to around 800 now.
Despite some of the shortcomings revealed in the report, Fed Vice Chairman for Supervision Randal Quarles pointed out at a Washington event earlier in the day that “all the data would show that it’s a very healthy industry.” He and other regulators appointed by President Donald Trump have been revising regulations put in place after the 2008 financial crisis, seeking to reduce capital burdens, dial back stress-test demands and rewrite Volcker Rule limits on banks’ ability to bet with their own capital.
The report shows profitability of the banking sector is soaring, with return on equity – a key measure of the industry’s health – at a 10-year high. And lending has been climbing steadily, with total loan volume up 30 percent in the last five years.
Quarles is scheduled to appear at hearings in the House and Senate next week to update oversight committees on the Fed’s supervisory efforts.
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